💰The Cost of Choosing

Every purchase you make represents a decision that excludes the possibility of acquiring something else.

Consider the latest iPhone, priced at AED 5,500. Twenty years from now, its value will be negligible.

In contrast, if you invest that amount in a low-cost, globally diverse index fund, it could grow to approximately AED 21,283.26.

Life is filled with various trade-offs, commonly known as 'Opportunity Costs.'

This principle is fundamental to both investing and everyday life.

In this week's newsletter, I will delve into why understanding opportunity costs is crucial. You'll learn how each decision, whether big or small, profoundly shapes your financial future.

What You’ll Learn:

• Discover how to apply the concept of opportunity costs in your daily financial decisions

• How the 3-Lens Principle can guide you in making more informed choices

• Why the best choice isn't always the cheapest

Understanding Opportunity Costs and Why It Matters

Opportunity costs represent what you give up when you choose one option over another.

Understanding it helps you weigh choices not just in terms of what they cost now, but what you could lose or gain in the future.

Opportunity Costs in Your Daily Life

1. Gadget Purchase vs. Emergency Fund: Buying the latest smartphone for AED 3,000? Think about the emergency fund you could have built instead. In times of need, this choice could mean the difference between financial stability and debt.

2. Dining Out vs. Cooking at Home: Spending AED 50 daily on eating out versus AED 20 for a home-cooked meal? That's an extra AED 900 per month that could be saved or invested.

3. Working Overtime vs. Upskilling: Extra hours at work might bring immediate income, but investing time in new skills could lead to greater earnings in the future.

4. Sending Money Home vs. Investing: Supporting family is important, but consider the growth potential of investing some of that money for your future.

5. Leisure Travel vs. Paying off Debt: A vacation might feel good now, but the accumulating interest on your debt could outweigh this temporary pleasure.

Struggling to evaluate opportunity costs?

Sometimes putting a price tag helps.

For instance, assigning a monetary value to the additional two to three hours you spend commuting each day can bring these costs into clearer focus, making them simpler to weigh and assess.

The 3-Lens Principle

I’m currently reading the latest book by Shane Parrish called Clear Thinking.

There, he recommends viewing opportunity costs through these three lenses or questions:

(1) Compared with what?

(2) And then what?

(3) At the expense of what?

As we prepared to welcome our baby, my wife and I contemplated whether to move from our current 1-bedroom apartment in Dubai. This decision wasn't just about money; it was about our family's future.

I haven’t learned about the 3-Lens Principle when we made the decision but that’s exactly what my wife and I did.

Compared with What? We compared our current apartment with two other options in Dubai. It wasn't only about rent; we considered space, location, and amenities. This helped us see the full picture, not just the cost.

And Then What? We thought about the long-term. Our current place is near a metro and park, offering convenience and a quality lifestyle. We realized the full impact of our choice goes beyond the present moment.

At the Expense of What? We asked what we'd lose by moving. Despite similar costs, a new place meant more travel time and less convenience. We valued our time, especially with a baby on the way.

Our Decision 

We decided to stay. This experience taught us that the best choice isn't always the cheapest. It's about what adds the most value to our lives. For us, it meant a home that supports our lifestyle and lets us spend precious time together as a family.

Saying "It's only AED 50" or "It's only one hour" minimizes the true value of your resources.

Every "It's only" is an opportunity slipping through your fingers.

Each spending decision is also an investment choice in disguise.

Whether it’s saving for retirement, funding your child’s education, or buying that dream home, every amount counts.

Understanding opportunity costs is like having a financial compass, guiding you towards choices that align with your most cherished goals.

Now go and make wise trade-offs!

Kuya Jay

🌟 You're Invited: Money Simplified Workshop on December 2nd!

Understanding Opportunity Costs is one of the key topics I’ll be discussing there!

Transform your financial outlook in just 3 hours with our first-ever online workshop. Dive into SMARTER goals, savvy spending, and powerful money management.

Don't miss out—this could be the day your financial dreams start taking shape.

👉 Click here for details and registration.

Use the code PURPOSE50 to get 50% discount.

Early bird rate is only until November 15!

See you there!